Limited Liability Companies (LLC)
A LLC is a company restricted by shares; whereby its liabilities are limited to the amount of share capital. Registered under the Singapore Companies Act, LLCs possess legal personality which means that they are distinct legal entities from their members. Accordingly, the liabilities of the owners would be limited to company assets, while their personal assets are immune. The different types of LLCs are listed below:
Private Limited Company (Pte Ltd)
A Private Limited Company is a LLC whose shares are owned by less than 50 individuals and are not available to the public at large. The shareholders of a private limited corporation can be either individuals or corporate bodies, or both. The majority of privately incorporated businesses in Singapore are incorporated under this structure.
Why entrepreneurs prefer Private Limited Companies?
Such a corporate structure is the most flexible and scalable business model in Singapore, and is seen to be the preferred choice of most entrepreneurs, compared to sole proprietorships or limited liability partnerships, for the reasons listed below:
A private limited company possesses independent legal identity, separate from its directors and shareholders.
In the event of liability arising from the business, the liability of members is capped to the amount that each party agrees to contribute (share-capital) to the company.
The continued existence of the company is not contingent on continued membership of any of its members. The procedural ease of change of shareholders and transfer of shares ensures that even in the event of resignation, death, or insolvency of directors or shareholders, the company continues to function.
Ease of raising capital
Companies are the best form of entity when it comes to the raising of capital , such as for expansion and working capital. This is done by issuing shares to new shareholders or to existing shareholders. Investors are more inclined to subscribe for shares in a company that has a clear separation between personal and business assets. Moreover, the majority of banks prefer to lend money to private limited companies.
As an incorporated business body, private limited companies are viewed with more legitimacy than sole proprietorships or partnership firms, and as a result, investors are more willing to invest in a company as it projects a clear vision of growth and expansion. As a whole, private limited companies are taken more seriously by potential clients, professionals, suppliers, and bankers amongst other entities that businesses interact with.
Ease of Ownership transfer
The ownership in a company is readily transferred; wholly or partially, without disrupting operations or the need for complicated legal documentation. This may be achieved through the sale of shares in whole or part.
Tax Incentives and Benefits
Private limited companies are highly efficient tax entities. The corporate tax applicable for profits up to S$300,000 is below 9% and capped at 17% for profits above this threshold. There is no capital gains tax in Singapore. In addition, Singapore follows a single-tier tax policy, which means that once a company’s income has been subject to tax at the corporate tier, dividends can be distributed to shareholders tax-free.
Public Limited Company
A public limited company is a LLC that is capable of offering its shares to the general public. Such a company must have a minimum of 50 shareholders and is subject to significantly stricter rules and regulations due to their ability to raise funds from the public. Usually, public limited companies are listed on a stock exchange, and are typically large corporations.
Public Limited Company Limited by Guarantee
This variant of public limited companies is a type of business entity meant for non-profit organizations.
Although the simplest business structure in Singapore, sole proprietorships are not separately incorporated entities, making this the riskiest business form. Legally speaking, the owner and the business are inextricably intertwined as one entity, as the owner personally owns all assets, but has all liabilities of the business. For that reason, as an owner of a sole proprietorship, you are exposed to unlimited liability, which is to say that creditors can sue you and go after your personal assets to resolve your sole proprietorship’s liabilities. Many entrepreneurs are unaware of the enormous financial risk that sole proprietorships expose them to.
A partnership business structure is similar to sole proprietorships’, except that it seeks to address the issue of limited-expansion within sole proprietorships by allowing two or more people to establish and co-own a business. Like sole proprietorships, partnerships have no independent legal existence, meaning that circumstances such as death, insolvency, incapacity or retirement of a partner may result in the inevitable end of the partnership. However, while such business structures are not recommended for most entrepreneurs, it may be suitable in certain situations. Partnerships in Singapore can be of three types:
General partnerships are usually not advisable business structures as mentioned above, because each partner is personally exposed to the partnership’s liabilities, and the actions of each partner can implicate the other partners.
A preferable alternative to general partnerships, limited partnerships include a general partner alongside a limited partner, where the latter’s liabilities are limited to its investment in the business be it through capital or property. The drawback, however, is that the limited partner does not possess a managerial capacity.
Limited Liability Partnership (LLP)
Amongst the three types of partnership business structures, LLPs are the most sophisticated and recent, combining the features of partnerships and companies, with its roots in the Limited Liability Partnership Act 2005. LLPs give owners the flexibility of operating a partnership while still enjoying the benefits that come with private limited companies.
A LLP is suitable for professional firms such as accounting firms, law firms, and architecture firms, where two or more professionals seek to establish a joint practice in a common field.
It is strongly recommended that the partners enter into written agreements on how profits and managerial responsibilities are to be divided. As the process of such agreements is not straightforward, lawyers are generally required in drafting such agreements. Partners in a LLP are typically responsible for attracting and maintaining their own clients based on the individual partner’s niche area. However, it is important to note that an LLP requires at least two partners at all times; ultimately still being a partnership, and is not suited to businesses that carry trades rather than professions.
Foreign Company Registration Options
A subsidiary company is a private limited company incorporated in Singapore with its parent company as its shareholder. For small and medium enterprises (SME), a subsidiary company is usually the preferred choice as there may be tax compliance issues or cost issues.
A branch office is registered locally as an extension of a parent company, and is not a separate and independently incorporated entity. Also, the liabilities of a branch office extend to its parent company.
A representative office is registered in Singapore as a temporary arrangement with the objective of conducting marketing research. A representative office does not possess any legal status and is restricted from engaging in profit-making activities.
Which business structure would be ideal for me?
Deciding on the right business entity type to incorporate would depend on your unique circumstances and objectives. However, as a general guide:
If you are a local seeking to register a small enterprise where you will be the only owner and importantly; the particular nature of your products and or services do not carry any liability issues, it might be more convenient to register your business as a Sole Proprietorship. However, it is important to note that this structure puts your personal assets at risk in an event of business liabilities arising.
If your business involves providing professional services (i.e. lawyer, accountant, doctor, architect, etc.), and you have one or more partners in the same profession seeking to establish a joint practice, an LLP might be a suitable model.
Generally, in most other cases, a private limited company would be ideal. Although compliance requirements would be undoubtedly more complicated, it is typically the best structure in the long run.
The article was originally posted at irblaw.com.sg